Over the last 35 years Lou has advised various large property development companies, government bodies and overseas investors in relation to all facets of property law. Lou’s practice has a significant focus on all aspects of ‘off the plan’ sales and the preparation of related contracts. Throughout his career Lou has been involved in and advised on over 100 major high rise apartment and off the plan projects.

Michael Gu is a law graduate from the University of Melbourne and has been working in the industry since 2018.

COVID-19 has dealt a heavy blow to the construction industry. Vendors of off-the-plan developments face extensive delays in construction, financing, and council approval.

Off-the-plan contracts usually contain ‘sunset clauses’ allowing a contract to be rescinded[1] by either the purchaser or the vendor if a plan of subdivision is not registered by a specified ‘sunset date’.

However, on 1 March this year, amendments to the Sale of Land Act 1962 (Vic) (Act) entered into force targeting the practice of vendors deliberately delaying registration of the plan for sub-division of a property, rescinding the contract under a sunset clause, and re-marketing the property during an upswing.[2]

In this article we explore whether vendors can:

• rely on sunset clauses to rescind their contracts in light of COVID-19.

• extend sunset dates due to delays in construction caused by COVID-19 related shutdowns.

Rescission by the vendor—the position before the amendments

Before the amendments, a vendor’s right to rescind under a sunset clause was determined as a matter of contractual interpretation.[3]

However, a vendor could not generally rescind if the delay in registration was the result of the vendor’s own ineffective or inefficient efforts to comply with the contract.[4] A vendor could not rely on a sunset clause if the vendor’s conduct has deprived the purchaser of the benefit of timely registration.[5]

Rescission by the vendor—the position after the amendments

Under the new rules, vendors can only exercise rights under a sunset clause in two ways:[6]

• With consent of the purchasers; or

• With leave of the Supreme Court where the Court is satisfied that rescission is ‘just and equitable in all the circumstances’.

How will the Supreme Court apply the amendments in light of the pandemic?

The Victorian Supreme Court has not considered these provisions. However, as the Victorian legislation is based on the regime in Division 10 of the Conveyancing Act 1919 (NSW), New South Wales decisions offer guidance.[7]

Vendors and developers might think that COVID-19 is an obvious reason justifying rescission under a sunset clause. The impact of COVID-19 on the construction industry is notorious and is evidently beyond the control of both parties. However, under the new rules, the Court now has a broad discretionary power to regulate rescission.[8]

To determine whether rescission is ‘just and equitable in all the circumstances’, the Court will start by considering the list of interlinked mandatory factors under s 10E(3) of the Act, summarised below.

• First, the terms of the residential off-the-plan contract.[9] Where a contract requires vendors to make ‘best endeavours’ to achieve registration, the Court applies a rigorous standard to assess a vendor’s conduct.[10] Where the contract does not expressly require ‘best endeavours’, the Court will imply this term into the contract.[11]

• Second, whether the vendor has acted unreasonably or in bad faith.[12] This includes whether notices of rescission provide full and frank disclosure of the reason for the delay. Misleading statements by the purchaser weigh heavily against granting rescission.[13] Similarly, the Court will consider whether the vendor was aware of, or could have accounted for, the prospect of the delay at the settlement date.[14]

• Third, the reason for the delay in registration.[15] Vendors and developers bear the burden of showing that the pandemic has caused, for instance, delays in obtaining construction finance, delays due to contractors being unable to access sites due to social distancing restrictions, or administrative delays in council approval.

• Fourth, whether the lot has increased in value.[16]

• Last, the effect of the rescission on each individual purchaser. The Court will consider purchasers’ financial loss, whether it is more difficult for purchasers to acquire a comparable property,[17] as well as the ‘disappointment’ associated with the loss of bargain itself, especially if purchasers are first home buyers, or if purchasers have waited a long time for the property to be built.[18]

These factors are not exhaustive, and no single factor weighs more heavily than the others.[19] Nonetheless, the cases show that the Court will take a restrictive approach that favours preserving the contract. In fact, as the Court is not limited to an order allowing rescission, and may make ‘any other order’,[20] the Court may grant rescission on terms—for instance, subject to an undertaking to register the plan, and offer the purchasers new contracts of sale under a higher price.[21]

It is clear that, under the new rules, vendors no longer have a ‘right’ to rescind under a sunset clause. Only the Court can give vendors that right—in fact, attempting to rescind without the Court’s approval is taken to be a repudiatory breach by the vendor.[22]

Rescission by the purchaser

In stark contrast, a purchaser’s right to rescind is unaffected by the amendments. Purchasers can still rescind an off-the-plan residential contract after the sunset date.[23]

In light of COVID-19, some vendors might seek to include a special condition allowing the vendor to extend the sunset date. The Victorian Court of Appeal has held that such extensions are invalid under the Act. A sunset date must be fixed and identifiable at the time the contract is concluded, regardless of whether the delay is the result of an intervening event beyond the control of the parties.[24]

Can COVID-19 be used to allow the vendor to extend a sunset date?

The Victorian Courts have not, as yet, had to deal with questions of extensions to contract sunset dates solely for COVID-19 reasons. There is really no precedent to give any real guidance.

However, the Courts have to date made it very clear that the contract must specify a sunset date that is clear and certain, and the contract must not allow for any ability to extend the date. Further the Courts have found that even where a ‘material change’ to the plan is a positive change for the purchaser, the fact remains it is a material change that still entitles the purchaser to avoid the contract. The legislation has been interpreted as needing to be applied to protect the consumer first and foremost. 

As a consequence of the foregoing, if the only reason for a vendor to request an extension of the sunset date is solely for COVID-19 reasons which can be proved, it is still unlikely a Court will agree to extend the date, particularly if there is any negative impact on the purchaser by allowing such an extension. COVID-19 reasons are likely to be treated in same way as any other reason out of the vendor’s control.

The impact of COVID related delays is a problem for vendors

Vendors and developers should be very cautious when purporting to rescind under a sunset clause, and need to be ready to justify their actions with fulsome evidence before the Supreme Court.

The new rules have swung the contractual pendulum in the purchaser’s favour. Purchasers can still rescind an off-the-plan contract pursuant to a sunset clause where COVID-related delays have blown out a development timeframe. However, based on recent decisions, the Court is unlikely to treat COVID-19 as an ipso facto reason for a vendor to rescind a contract.

[1] For clarity, this note uses ‘rescission’ in a general sense to refer to the rights under a sunset clause. This sense of ‘rescission’ is also used in the Sale of Land Act 1962 (Vic).

[2] See further: https://www.holdingredlich.com/a-setting-sun-the-use-of-sunset-clauses

[3] Westralian Farmers Ltd v Commonwealth Agricultural Services Engineers Ltd (in liq) (1936) 54 CLR 361, 370-80.

[4] Suttor v Gundowda Pty Ltd (1950) 81 CLR 418, 440-1; Hardy v Wardy [2001] NSWSC 1141; Plumor Pty Ltd v Handley (1996) 41 NSWLR 30, 34.

[5] Joseph Street Pty Ltd v Tan (2012) 38 VR 241, 257. See also the authorities cited in Mordue v Kroone [2009] NSWSC 255 (20 February 2009) [16].

[6] Sale of Land Act 1962 (Vic) s 10B.

[7] Jobema Developments Pty Ltd v Zhu [2016] NSWSC 3; applied in Bradstreet v Merrin Developments Pty Ltd [2017] NSWSC 1559.

[8] Ibid [188]

[9] DGF Property Holdings Pty Ltd v Di Federico [2018] NSWSC 344 (23 March 2018) [200], [276].

[10] Joseph Street Pty Ltd v Tan (2012) 38 VR 241, 256-7; citing IBM United Kingdom Ltd v Rockware Glass Ltd [1970] FSR 335, 343 (Buckley LJ); Hawkins v Pender Bros Pty Ltd [1990] 1 Qd R 135, 150-1.

[11] Joseph Street Pty Ltd v Tan (2012) 38 VR 241; Etna v Arif [1999] 2 VR 353, 373.

[12] See, eg, Jobema Developments Pty Ltd v Zhu [2016] NSWSC 3 (12 January 2016) [24].

[13] Silver Star Fashions Pty Ltd v Dal Broi [2018] NSWSC 1445 (26 September 2018) [151], [158], [163].

[14] Jobema Developments Pty Ltd v Zhu [2016] NSWSC 3 (12 January 2016) [27].

[15] DGF Property Holdings Pty Ltd v Di Federico [2018] NSWSC 344 (23 March 2018) [280]; Silver Star Fashions Pty Ltd v Dal Broi [2018] NSWSC 1445 (26 September 2018) [195].

[16] See, eg, Jobema Developments Pty Ltd v Zhu [2016] NSWSC 3 (12 January 2016) [25].

[17] Silver Star Fashions Pty Ltd v Dal Broi [2018] NSWSC 1445 (26 September 2018) [192]

[18] Ibid, [171]-[173], [191].

[19] Sale of Land Act 1962 (Vic) s 10E(3)(g); Silver Star Fashions Pty Ltd v Dal Broi [2018] NSWSC 1445 (26 September 2018) [190]

[20] Ibid, s 10E(4).

[21] DGF Property Holdings Pty Ltd v Di Federico [2018] NSWSC 344 (23 March 2018) [391].

[22] Sale of Land Act 1962 (Vic) s 10D; Klein v McMahon [2017] NSWSC 1531 (13 November 2017) [41]; Scott v Ennis-Oakes [2019] NSWSC 1257 (23 September 2019).

[23] Sale of Land Act 1962 (Vic) s 9AE(2).

[24] Harofam Pty Ltd v Scherman (2013) 42 VR 372; Solid Investments Australia Pty Ltd v Clifford (2010) 27 VR 41.